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Accounting: Break-even quantity and capital strucuturing.

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16.1 Shapland Inc. has fixed operating costs of $500,000 and variable costs of $50 per unit. If it sells the product for $75 per unit, what is the break-even quantity?

16.2 Counts Accounting has a beta of 1.15. The tax rate is 40% and Counts is financed with 20% debt. What is Counts's unlevered beta?

16.3 Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk?

16.4 Nichols Corporation's value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments
before or after the recap. After the recap, wd _ 0.4. What is S (the value of equity after the recap)?

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Solution Summary

The problem deals with estimating the break-even point and evaluating different capital structures.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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